Check received in 09, 1099R received in 10

[mcb39]

How would you handle this?. Client received inheritance from deceased brother. Last year, 2008, he received and we reported several inherited IRAs. This year, 2009, on 01/19/09, he receives a check for approximately $39,000, apparently from an annuity. No 1099. We filed 2008 taxes without inclusion of annuity as there was no 1099 and he received the money in 09. Assumption was that 1099 would come this year. Wrong! Had to have client call Ins Co and ask for a 1099 because over $4000 in Fed taxes had been withheld (apparently). Client just received 1099, but is dated 2008. Do we have to amend a very complicated 2008 return and face possible penalties or can we include this in his 2009 very complicated return? Insurance Co will not assist any further (of course) and withholding amounts do not even agree. Also no state is withheld. At least the distribution code is correct at 4. Any ideas out there?

[TAXBILLY]

I would set up a meeting at the local IRS office with you and your client with all of the relevant paperwork and the proof of when the check was received and let them unravel it.

taxbilly

[michaelmars]

stop with customer support at the ins co. ask for their tax or their compliance officer and discuss it with him to determine if its really a 2008 or 2009 income

[mcb39]

The client and I did set up a meeting this morning at the local IRS office. The resulting view taken by the IRS, taken from Pub 538, Page 14 is that the money was constructively received in 2008. "Income is constructively received when an amount is credited to your account or made available to you without restriction. You need not have possession of it." Just because the check and/or the 1099 got lost in the mail, or were mailed late has no bearing on the fact that my client had constructively received the money in Dec, 2008. Therefore, we will have to amend the 2008 return and include the money in income even though the check was not written or received until January, 09. It was the opinion of the agent with whom we spoke that this is a common audit issue and if we were to claim it in 09 and later be audited, we would most likely lose. So, there you have it. Thanks, Taxbilly, for the suggestion. The results are not cost effective for the client, but at least the air is cleared. As long as I had their attention, we cleared the air on a few other issues as well.

The downside is that you cannot set up an appointment. You have to wait in line. My client went there and waited in line until he was getting close; then called me and I met him there. Very time consuming at this busy time of the year. I did think that some of you might like to know what the results were.

[Catherine]

Thanks for letting us know the result!

[Margaret CPA in OH]

This is very interesting, indeed. I just wonder how "the funds would be made available ... without restriction" when the check was not even prepared until January. Would the client have been able to appear at the office and demand the cash in December? Scratching head here...

[mcb39]

We asked that same question.; mainly because the 2010 Master Tax Guide, paragraph 2177, page 690 states that ".....the distribution minus the aggregate amount of the owner's nondeductible IRA contributions, is taxed as ordinary income in the year the distribution is received. (Rev. Rul. 92-47)" They looked up that Revenue Ruling and said that it "meant" constructively received. That means that the IRA belonging to the deceased was closed and the monies were placed in an account somewhere and were available to the beneficiary whether he actually had it in his possession or not. Once we were told that we would have little chance of winning at audit, it hardly seemed sensible to take the chance. Financially this was a very disappointing conclusion for the taxpayer. He was quite high income last year; and very low income this year. Otherwise, we wouldn't have cared. In fact, he is so low income this year that without claiming this IRA in 2009 he loses his entire $1500 energy credit for the new windows he put in his house. He zeros out on tax before he gets to the credit. However, all lines have to be drawn somewhere.

Speaking of which, does anyone know if the inability to use the entire energy credit in 09 will carry forward to 2010?

[jainen]

>>were available to the beneficiary whether he actually had it in his possession or not<<

It seems to me the IRS has been very consistent about this interpretation, and the courts have supported their hard-line position. My own opinion is that, whether one agrees or not, in a practical sense it is usually better to accept the 1099 as is than try to fight without any authority to cite. However, it should be very easy to get any late payment penalty waived for reasonable cause.

[mcb39]

>>were available to the beneficiary whether he actually had it in his possession or not<<

It seems to me the IRS has been very consistent about this interpretation, and the courts have supported their hard-line position. My own opinion is that, whether one agrees or not, in a practical sense it is usually better to accept the 1099 as is than try to fight without any authority to cite. However, it should be very easy to get any late payment penalty waived for reasonable cause.

Thank you for your comments, Jainen. Of course, we plan to proceed as advised. We will amend the 2008 return and I agree that we shouldn't have a problem with penalties. What I wanted was a clear-cut black and white answer and I feel that we got it and will prepare the returns properly. I was hoping that you would have something to say about this.